Main navigation

Provisional Tax – Five questions answered.

Question 1: What is provisional tax?

Answer: Provisional tax is essentially “providing” for your income tax liability in relation to the current financial year. This is similar to PAYE (“Pay As You Earn”) but is paid in installments (usually three), and is based on either, actual results from the previous financial year, or, estimated results for the current year. Once your current year results are established, the remaining “wash up” is known as “Terminal Tax”, and can either be a payment (underpaid provisional tax), or a refund (overpaid provisional tax).

Question 2: How do I know if I’m a provisional tax payer?

Answer: You will be a provisional taxpayer if your residual income tax liability (RIT) is greater than $2500. RIT is the calculated income tax on your taxable income (less any tax paid “at source” i.e. PAYE, RWT).

Question 3: How do I calculate my provisional tax?

Answer: There are three options to calculate your provisional tax.

Standard (based on the previous year)

Estimation (if you think your results are significantly different to the previous year)

Ratio (Based on the amount of GST you pay)

If Johnston Associates South prepared you income tax return in the previous year, we will advise you on the best method for your business, and also the amount you are required to pay. For more information on these options visit the IRD website.

Question 4: When is my provisional tax payment due?

Answer: We have a key installment date coming up on 28th August. If you are due to pay on this date, you should have by now received a tax letter from us advising you the amount to pay. If you have not yet received a letter and think you should be making a payment, please do not hesitate to contact your friendly Johnston Associates South team member. Please visit the IRD website for a list of all important provisional tax dates.

Question 5: What happens if I don’t pay on time?

Answer: If you pay late or don’t pay the full amount, late payment penalties and interest may apply. We note that if you think your current years trading is significantly different to the previous year, you may be paying too much (or too little). Once again, please do not hesitate to give us a call (if we do not call you first)!